Palantir at All-Time Highs: Buy Now or Brace for a Reality Check?

Key Points

• Palantir's commercial revenue growth outpaced its government revenue growth in the first quarter (Q1).

• In Q1, Palantir closed 31 deals of at least $10 million and 51 deals of at least $5 million.

• Palantir is the most expensive stock in the S&P 500 based on its forward earnings.

• 10 stocks we like better than Palantir Technologies ›

Through the artificial intelligence (AI) boom over the past few years, Nvidia has gotten a lot of attention (rightfully so in many cases), but many would be surprised to see that its stock hasn't been the biggest beneficiary. That would be Palantir (NASDAQ: PLTR), which is up over 2,300% -- more than double Nvidia's gains in that span.

Palantir is a software company that builds data and analytics tools that help governments and companies gather insights from large and complex datasets. It may sound relatively simple in theory, but it's fairly hard to do at the scale that Palantir does it. And investors have seemed to take notice.

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With Palantir's stock hovering near its all-time high, it's normal to wonder whether it's time to hop on the roller coaster while it's still on its way up, or brace for a reality check as investors begin to question if its valuation is warranted. In this case, I believe it's much closer to the latter.

Palantir is putting up solid earnings results

Let's start with some positive news, and that's Palantir's recent earnings. Palantir is mostly known for its work with U.S. government agencies like the CIA and the Department of Defense. That's been its bread and butter for a while, but its Artificial Intelligence Platform (AIP) has been a huge boost to its commercial business.

In the first quarter, Palantir's U.S. government revenue grew 45% year over year to $373 million, and its U.S. commercial revenue grew 71% year over year to $255 million. Its $884 million in total revenue (up 39% year over year) continued its impressive growth, which has seen its revenue grow over 200% in the past five years.

PLTR Revenue (Quarterly) data by YCharts

Much of this growth can be attributed to Palantir closing large six-figure-plus deals. It closed 139 deals of at least $1 million, 51 deals of at least $5 million, 31 deals of at least $10 million, and grew its total customers by 39% year over year.

Palantir expects its fiscal year revenue to fall between $3.89 billion and $3.90 billion, which would be around a 36% increase from 2024.

It's hard to ignore Palantir's high valuation

Palantir's recent stock price explosion is great news for investors who've held the stock. However, it's not-so-good news for investors looking to acquire their first shares or add to their existing holdings. To put it lightly, Palantir's stock is extremely expensive.

As of July 29, Palantir's stock is trading at an absurd 270 times its forward earnings. That's hard to justify for any business in any industry, but especially one whose main business (government contracts) isn't known for being high-growth and has yet to show its current growth rates are sustainable long-term.

PLTR PE Ratio (Forward) data by YCharts

Notable past software companies that have reached extremely high valuations -- and still much less than what Palantir currently is -- haven't fared well since that peak. Zoom Communications, Bill Holdings, and Snowflake each traded at triple-digit multiples of their sales at one point, and they're now down 86%, 86%, and 45% from their peaks, respectively.

This doesn't mean Palantir will follow the same fate, but it would need to have a historical and unprecedented run to justify the levels it's currently trading at. And unfortunately, I don't see it happening.

How investors should approach Palantir's stock

If you're a believer in Palantir's long-term potential, I would recommend dollar-cost averaging to begin or continue acquiring shares. When you dollar-cost average, you decide on an amount you're willing to invest in a stock and then put yourself on a set investing schedule, making the investments regardless of prices at that time.

For example, if you have $1,000 you want to invest in Palantir, you could decide to invest $100 every other Monday, $250 on the first of each month, or whatever works best with your situation. The schedule you put yourself on isn't as important as making sure you stick to it and stay consistent through ups and downs.

By dollar-cost averaging, you avoid a situation where you invest a lump sum right before a huge stock price drop happens. Palantir has had instances where its stock price dropped by double-digit percentages in a day, so it's not that far-fetched -- especially with its current stretched valuation.

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Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bill Holdings, Nvidia, Palantir Technologies, Snowflake, and Zoom Communications. The Motley Fool has a disclosure policy.